Singapore and Korea are leading Asia’s central banks’ fight against inflation

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Bank of Korea unexpectedly hikes interest rates, Monetary Authority of Singapore tightens policy

Bank of Korea unexpectedly hikes interest rates, Monetary Authority of Singapore tightens policy

Both Singapore and South Korea tightened monetary policy on Thursday, closely followed by rate hikes in Canada and New Zealand as global policymakers acted swiftly to prevent rising inflation from derailing a sluggish global economic recovery.

While the four central banks began tightening monetary policy last year to curb price hikes caused by COVID-19-related logistics shortages, the war in Ukraine that began on February 24 has since increased supply pressures and urgency for increased policymakers to bring forward planned rate hikes.

“We are likely to see more Asian central banks advance the timing of rate hikes,” said Toru Nishihama, chief economist at the Dai-ichi Life Research Institute in Tokyo. “That could hurt growth, but with inflation becoming an increasingly imminent problem, they have little choice but to move towards tighter monetary policy.”

The Asia-Pacific economies have largely lagged behind the reopenings of the US and Europe due to the pandemic, meaning central banks in Australia, India and Southeast Asia have mostly viewed inflationary pressures as temporary and have been more focused on underpinning their recovery.

Singapore, South Korea and New Zealand were the exceptions and were particularly concerned about rising import price costs and financial stability in general.

The Bank of Korea announced a surprise rate hike of a quarter percentage point on Thursday.

Most economists had expected her to hold the fire while awaiting the appointment of a new governor, but with inflation in Asia’s fourth-biggest economy at a decade high, the bank said waiting wasn’t an option.

Meanwhile, Singapore tightened policies that affect its currency rather than interest rates for the third time in six months, citing new risks from the Ukraine war.

Both meetings came less than a day after resource-rich economies New Zealand and Canada hiked their respective interest rates by a hefty half a percentage point, the largest such hikes in two decades.

New Zealand’s surge was larger than economists expected and Canada warned more was needed.

‘Get there quick’

Vishnu Varathan, head of economics and strategy at Mizuho Bank, said Singapore, South Korea, New Zealand and Canada were among a group that saw an urgent need to forestall the threat of inflation.

“The so-called ‘Kokomo club’ of central banks, which aim to ‘get there fast and then take it slow’, are bound to be tightening frontloads, with hikes of 50 basis points as a hallmark,” Mr Varathan said. refers to lyrics from the 1988 hit song “Kokomo” by the Beach Boys.

While larger competitors like the Federal Reserve and the European Central Bank are not quite as aggressive in their stance, he said they are moving in that direction.

The challenge for many economies is that they have only just begun to anchor safe recovery from major pandemic-related downturns, although inflation has since forced worries that prices could trigger broader financial and price instability.

In fact, even some of Asia’s less restrictive central banks are feeling the pressure to end their crisis-era policies.

The Reserve Bank of Australia kept interest rates on hold last week but dropped a hint in its statement to be “patient” in monitoring economic conditions.

Australia’s job market remains extremely tight with unemployment at a 13-year low and markets are now anticipating the first spike since the pandemic began in June.

India’s central bank also kept interest rates at record lows last week but announced a move away from ultra-loose policy.

While the economic impact of the Ukraine war is seen primarily in inflationary terms for the time being, analysts warn that as energy and food prices soar, policymakers need to pay particular attention to slowing growth.

Shane Oliver, head of investment strategy and chief economist at AMP Capital in Sydney, compared current conditions to the 1973 Saudi oil embargo, which triggered a global price shock.

“(Central banks have) this dilemma that inflation expectations go up the longer this goes on, and it’s been a year now and inflation will be self-sustaining, much like it was in the 1970s,” he said.

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